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Probing for value

8 November 2011 By John Foley

How bad could things get at Olympus? Apocalyptic, answers the market. The company has lost $6 billion of market value since it ousted its chief executive Michael Woodford on Oct. 14. That move unleashed accusations of accounting fraud centred on its $2.2 billion purchase of UK firm Gyrus in 2009. Yet Olympus remains a leader in its field. Assuming a viable company still lives beneath the mud, there could be significant upside in Olympus’ shares.

Consider the Japanese company’s crown jewel: endoscopes. Unglamorous perhaps, but it is a profitable business and Olympus is the world leader. Demand for its products shouldn’t be too badly affected by governance problems. It also boasts an 80 percent market share in China, where medical spending is growing in double digits, and where there’s no big local competitor.

What is that core business worth? Take last year’s 355 billion yen ($4.6 billion) in revenues and assume the company can grow them by 10 percent for the next three years. The idea of getting margins from 20 percent now to 27 percent by 2014, as analysts once hoped, may be a pipe dream – but if it got to 23 percent, it would make 110 billion yen of operating profits. Valued alongside rivals Hoya and Stryker Corp, that’s worth 800 billion yen.

Olympus also has an industrial devices business. If that merely treads water, it will make 9 billion yen of operating profit in 2014. On the multiple equivalent to rivals Brother and Seiko Epson, that part of the business is 50 billion yen.
Finally assume – pessimistically – that Olympus’s loss-making cameras and handsets have zero value. Deduct 425 billion yen of net debt, and Olympus is worth 425 billion yen. Investors valued it at half that sum of the parts on Nov. 8.

A discount is clearly justified. Even with a clean-out of the board, the company could still face write-downs of past deals, and big fines. Meanwhile, takeover bidders are unlikely to emerge until the dust has settled. But the current price only makes sense if Olympus had to write down the entire value of its purchase of Gyrus, and then some. The bold may want to take another look.


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